Telecom Firms Could Meld Efforts to Pare 3G
Costs

By

Vito J. Racanelli

Updated Feb. 26, 2001 12:01 a.m. ET

Order Reprints

Print Article

Text size

A t least three of the six firms saddled with German 3G wireless licenses costing more than eight billion euros each are looking for ways to cooperate on cutting the heavy network buildout expenses to come.

The three --
KPN
's E-Plus; Viag Interkom, a unit of British Telecommunications; and Group 3G, a joint venture of
Sonera
and
Telefonica
-- are in talks to explore ways of sharing infrastructure costs, according to people familiar with the situation.

The companies declined comment, but they have already discussed this possibility individually with the German telecom regulator, these people note. The status of talks among the companies themselves isn't clear, but since the regulator is thought to be unopposed to some form of cost sharing, those discussions could come soon.

As this column pointed out last week, cooperation on the 3G infrastructure in general and in Germany, 3G's biggest market, in particular seems imperative for any possible turnaround in the stock prices of the beaten-down telecom sector. Vodafone excepted, these firms labor under heavy debt loads. Given that spending for each network could amount to three to five billion euros or more in the large countries, sharing the buildout -- especially in more costly rural areas -- could lead to significant savings.

If eventually the companies agree on a formula that substantially slices German 3G expenses, that would be a positive for the stocks, says Adrian Darley, a portfolio manager at Gartmore Investment Management.

However, Darley also points out, there are other questions to consider in any cooperation agreement. For example, will the operators get a portion of the license cost refunded, and will the regulator tie tariffs to capital spending? Moreover, there could be capacity constraints to sharing infrastructure, and billing and advertising costs won't be affected by cooperation.

"Still, this is a group that could use some positive news," Darley adds.

T he Dow Jones Stoxx pan-European index last week fell about 4% to 333.86 in a retreat led by technology stocks.

The deepening selloff in European equity markets has tended to obscure the three-month-old financial crisis at the Continent's periphery. Things took a big turn for the worse in Turkey last week when the country's president and prime minister battled over the pace of investigations into corruption in the country's banking system. The lira was devalued by about 30% and overnight lending rates halved to around 1,300% Friday from Thursday. At the moment, the situation is dire but many observers don't yet see this spreading the way the Russian crisis did in 1998. So far, the damage seems limited to domestic markets and to other emerging markets like Russia and Argentina.

Roger Monson, a strategist in emerging European markets at CA IB Investmentbank, acknowledges that there's some danger of a global systemic crisis, "but the odds are 60%-70% that Turkey will find a way through this without a major crisis." Turkey's economic structure and rule of law is better developed than Russia's, he says.

As for damage to European equity markets, German banks have the biggest direct exposure to Turkish loans. That's not the real worry, however, notes Norrie Morrison, an analyst at Arnhold & S. Bleichroeder. For German banks, the amounts are typically a small part of the total portfolio, he says.

Where investors need to look, he adds, is at the bank's foreign-currency trading exposure and products like derivatives and swaps contracts. Unfortunately, this kind of information isn't readily available.

As with the Russian crisis, if there is Turkish fallout for the German banks it could come much later, when they report first-quarter or first-half results, he explains.

I t's easy to understand why Dresdner Bank Chairman Bernd Fahrholz would be less than eager to consider another waltz down the aisle. Remember, Dresdner last year failed in its merger attempt with
Deutsche Bank
and held preliminary discussions with
Commerzbank
that went nowhere. When Fahrholz talked with Barron's last week in New York, a big merger seemed to be the last thing on his mind: "Never say no, but we aren't actively looking for a merger partner."

One merger possibility that's been raised for Dresdner is
Allianz
, the giant Munich-based insurance company that holds stakes in many of Germany's biggest enterprises, including 22% of Dresdner. But Fahrholz's comments last week seemed to indicate that an AllianzDresdner union, along the lines of the Citicorp-Travelers merger, is unlikely for now. In fact, Fahrholz may be selling Dresdner's 10% stake in Allianz. He's been saying that the bank will sell off its "non-core" assets, and last week he added that he considers insurance to be decidedly in that category.

In lieu of merger dreams, Fahrholz is concentrating on his strategy for building shareholder value from inside Dresdner, Germany's third-largest banking concern. Investors will be happy to hear that, considering that the banking company's shares, at E44 last week, are about where they were three years ago. On top of that, the bank announced last week that pretax profits last year fell 24% to E1.6 billion owing to lower trading profits, merger-related costs and soured loans.

Fahrholz, who took charge last spring, has retreated from commercial lending outside Europe and in September announced the acquisition of Wasserstein Perella, the New York-based investment bank known for its prowess in mergers and acquisitions. Wasserstein has been combined with Dresdner's U.K.-based investment bank, and is now known as Dresdner Kleinwort Wasserstein.

In Germany, Fahrholz is cutting back his retail-branch network by 5,000 employees and 300 offices, leaving the bank with 850 branches. Even though many bank branches are unprofitable in Germany and have to be subsidized by other parts of a bank, there is heavy political opposition to closings. Fahrholz says he doesn't plan to shutter more than the announced 300, at least in the near term.

Another solution might be to go the U.S. route, raising fees for low-end customers. Fahrholz declined to offer any specifics, but he did say, "In general, we want to curtail cross-subsidization."

Dresdner has some legitimate claim to being ahead of its German rivals in ushering the "equity culture" into Germany. The bank has been a pioneer in offering mutual funds and other investment products. Dresdner's strong relationships with middle-sized companies in Germany should help as well. These companies now rely largely on commercial loans, but over time they could be taken to the stock and bond markets. In addition, the wealthy owners of middle-market companies provide a healthy client base for Dresdner's private-banking business.

While Fahrholz's strategy seems well-reasoned, Dresdner's credibility --and its stock price -- will recover only with good execution.

T he idea that the euro will rise against the U.S. dollar has gained devotees lately.

Boonstra, who retires this May to a life of sailing, said in an interview with Barron's last week that "there is no real political union in Europe yet, and it will take quite a long time for the Common Market to be a real common market." The perception is that national governments still matter a lot on Europe-wide economic issues and "that doesn't give the impression that you have one front on the euro." This underscores the need for closer European political unity, leading to the conclusion that the dollar weakness "will only be temporary."

The Philips CEO also finds it difficult to swallow the idea -- often expressed by companies issuing profit warnings and by analysts at investment banks -- that the general economic slowdown will be confined to the first half of 2001 and that growth will then resume: "I could easily see that this will last longer. I find six months too optimistic."

Boonstra indicates that, in the event of a serious downturn, the first cost-cutting steps the company would take would be outsourcing some production and improving information technology. In such a scenario, with reference to its wireless handset division and to some other consumer-product areas in particular, Philips could look to be more of a developer and marketer than a manufacturer.

Indeed, this year could be crucial for the handset business, a relatively small part of the conglomerate but one Boonstra calls "a battlefield." The division has, as Boonstra notes, "a not very satisfactory" 7% share of the market. Philips produces about 14 million units a year, and Boonstra thinks the company should be able to double that. "But if we cannot reach 30 million eventually, then we have to decide whether we should do this with someone else or not at all. This will be the year where we evaluate how we get there."

In terms of acquisitions, Boonstra says, the company hopes to bolster its semiconductor capabilities for wireless communications. "There are some technologies [there] that we don't do, but need." However, all these concerns will fall to his successor, Gerard Kleisterlee. Boonstra's post-April plans: sailing his new boat to the Caribbean from the Mediterranean.

The conglomerate discount that Philips stock receives tends to keep a lid on gains when the tech sector rises. But the company shouldn't be hurt as much as some of its peers when the tech sector tumbles, as it is doing now. At Friday's close around 32, the ADRs trade at 14 times consensus 2002 earnings estimates.

Telecom Firms Could Meld Efforts to Pare 3G
Costs

A t least three of the six firms saddled with German 3G wireless licenses costing more than eight billion euros each are looking for ways to cooperate on cutting the heavy network buildout expenses to come.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.